Regulatory disadvantage for Swiss fintech start-ups

Geneva's Fintech Factory hopes to give the fledgling finance technology industry a kick start fintech factory

Two incubators to help fintech start-ups are currently being set up in Switzerland, one by the SIX Group and the other is Fusion. However, tax evasion legal issues, a tougher regulatory environment and volatile markets are holding back the Swiss fintech sector.

The Geneva-based Fusion, the Swiss Fintech Factory, is at an advanced stage and aims to be operational by the autumn once promising start-ups from around the world have been found.

“In order to be successful, Switzerland needs to have a distinctive positioning,” Guillaume Dubray, managing partner at venture capital firm Polytech Ventures – which is behind the Fusion incubator – told swissinfo.ch.

Fintech revolution

Fintech is the latest buzzword circulating around the financial world, encompassing a wide gamut of services from virtual currencies to digital wealth management and Apps for basic money transfers. Accenture calculates that fintech start-up investment tripled last year to $12.21 billion (CHF11.3 billion) while Goldman Sachs fears new technology could take $4.7 trillion away from established financial firms. Huge technology firms like Google and Alibaba are also joining the feeding frenzy. And consumers are just as likely to be ordinary households as Wall Street traders and billionaires.

“British fintech focuses on payments and capital markets. Switzerland needs to focus on other areas where it has an edge; wealth management, asset management and data security.”

Dubray believes the best chance of fintech success will come in the shape of start-ups that provide banks with digital solutions rather than platforms that compete with them for clients.

“Swiss fintechs will gain much more advantage partnering with banks than taking them on,” Dubray said. “Only UBS and Credit Suisse have the financial power to have dedicated teams focusing on digital advances. No-one else has that luxury.”

Banks: no time, nor money

Scores of other Swiss banks are currently grappling with tax evasion legal issues, primarily in the US, taking up time and capital that could be employed in new technologies. And the tougher regulatory environment, combined with volatile markets, has further reduced the amount of time and money banks can spend on developing new platforms.

Switzerland’s two fintech incubators were set up with the aim of kick starting the fledgling sector that is rapidly falling behind the United States, Britain, Germany and other countries.

But even if they prove successful in pushing through a greater volume of promising start-ups, they may start to run into roadblocks, according to some sceptics.

The new, disruptive technology could ruffle feathers in the established banking scene as well as the Swiss Financial Market Supervisory Authority, FINMA, Daniel Aegerter, venture capitalist and chairman of Armada Investment, told a fintech conference in Zurich last month.

“We will find out what position FINMA takes once fintech starts to disrupt, compresses margins and makes bankers go away to politicians to say that they can’t pay as much in taxes,” he opined. “First they will laugh at us, then take us seriously and finally they will try to kill us.”

True Wealth

Not everyone agrees with this draconian vision. “It would be strange to put pressure on start-ups just because they offer a better financial service,” Felix Niederer, founder of digital wealth management advisory platform True Wealth, told swissinfo.ch.

“I don’t think we are a threat to established wealth managers because we are in a niche, targeting passive investors. Clients with less than CHF500,000 to invest just aren’t interesting to banks anymore.”

Finding investors to back his growing fintech platform was not difficult, according to Niederer, despite Switzerland’s small size and the danger that his service could disrupt the established banking scene.

The dark side

The banking industry believes it has good reason to take a more measured approach. “Fintech is efficient for speed but it must not align itself to the ‘dark internet’, that part of the internet that hides away from all regulation,” Michel Juvet, a partner at Bordier private bank told journalists in Bern. The challenge is to regularise payments otherwise we will move into the nightmare of money laundering issues.”

Another issue, according to the Swiss Bankers Association (SBA), is the sometimes clunky regulatory environment in Switzerland. “In London, you can open an online bank account in ten minutes,” SBA chief executive Claude-Alain Margelisch said. “In Switzerland you have to physically appear in person to sign the documents. We have the technology but we are restrained from using it by legal requirements.”

Fintech start-ups are even more scathing about FINMA. “We invited FINMA to meet up with us so we could get information on regulations,” said Christina Kehl, co-founder of insurance fintech service Knip. “But there was no interest whatsoever.”

“This is a dramatic difference to the financial regulator in London [the Financial Services Authority] that has a dedicated programme to advise fintech start-ups.”

FINMA told swissinfo.ch that it is has no particular fintech strategy because the current laws that it enforces, set by parliament, also contain no specific fintech clauses.

Parliament is currently debating a host of financial regulatory changes, some of which could apply to fintech start-ups, FINMA added.

Swiss fintech scene

Online brokerage firms are well established with the likes of Swissquote and TradeDirect allowing armchair investors to buy shares, bonds and other investments. Avaloq and Temenos are among a group of companies that provide financial software to help banks build digital platforms. E-banking services such as Crealogix, digital wealth management and insurance platforms such as True Wealth and Knip are springing up alongside virtual currency firms Monetas and Xapo (the latter recently moved from London). UBS and Zurich Cantonal Bank recently teamed up with the Swiss stock exchange to create a personal payment App called Paymit. Glarus Cantonal Bank has developed Switzerland’s first platform for prospective homeowners not just to get quotes, but also to seal their mortgage loan at a click of a button.